How Trump will impact your taxes
Janet Yellen, head of the Federal Reserve, recently stated, “We are operating under a cloud of uncertainty at the moment.” We were playing economic checkers before President Donald Trump’s election, and now, the game is chess.
Michiganians should prepare for likely changes in 2017. Taxes will change, which is good for stocks, but may create deficits. Infrastructure spending will likely increase, which will increase jobs and commodity prices, but also generate deficits. Immigration policies will likely change, increasing wages, causing inflation and a potential job shortage. Trade policy has changed, and that will continue. And deficit spending puts pressure on debt, which causes interest rates and inflation to rise.
So, probably: lower taxes, higher inflation, higher interest rates, meaning a better U.S. economy in the short run.
■Taxes: Tax reform is already shaping up to be a priority, and may come very quickly since Trump and the House are largely on the same page.
Individual taxes will likely be simplified, with the highest bracket taxpayers getting the largest cut. Our firm ran 850 tax returns and showed tax reductions for about 75 percent of our (upper-middle class) clients. For others, mostly head of household filers, it raised taxes. This will be positive for the economy in the short run.
If the business tax rate is reduced as promised, businesses will profit more, boosting their prospective value. The proposed tax holiday will repatriate offshore profits, benefiting the economy.
■Infrastructure: Trump has vowed to make significant repairs and improvements nationwide. The Economic Policy Institute estimates that a $250 billion dollar debt-financed infrastructure program would increase GDP by $400 billion.
■Immigration: Something tells me (President Pena Nieto’s tweet?) that Mexico isn’t paying for any wall. Border security changes will increase debt and deficits. And, according to the Pew Research Center, undocumented immigrants equal about 5 percent of the U.S. workforce. Taking those workers out of the system in a relatively full employment scenario would likely cause inflation.
■Trade: Trump has immediately taken action, and it makes me nervous. The world is globalized, and global trade is prolific. If trade agreements are negotiated to “fair trade,” then the economic effect will be positive, particularly for exporters. But if the agreements turn punitive, we then have the “Smoot Hawley” scenario, a punitive tariff act passed in 1930. Many, including Ben Bernanke, believe it caused the Great Depression. A major trade war is bad for all sides.
Bottom line: The whole world has changed.
Leon C. LaBrecque, CEO
LJPR Financial Advisors, Troy